Few banks have targeted the investment management business with more vigor than Pittsburgh's PNC Bank Corp.
But with markets lagging this year, and the investment management field glutted with institutional and mutual fund managers, is now the right time to go after the business?
Some experts are beginning to wonder.
"There's always been a certain assumption that the - asset management business
was a natural add-on for banks," Nancy A. Bush, regional banking analyst with Brown Brothers Harriman in New York.
But disappointing returns have lead her to doubt that assumption,
"The jury is still out on whether being a huge asset manager is the way to go." she said.
For their part. PNC officials. like officials of other banks hot after the investment business, make no bones about their ambitions. Instead, they said they hope to grow their investment operations tremendously.
"Our historical capability as a money manager is something that distinguishes this company," said Richard C. Caldwell. the PNC executive vice president for investment management and trust.
PNC took a big step toward an even higher profile in the business in June when it agreed to buy institutional money manager BlackRock Financial Management LP, New York, for $240 million in cash and notes.
The acquisition, which is expected to close by yearend, will add $22.5 billion,of discretionary assets to PNC's portfolio, bringing the total to $77 billion, of which some $20 billion is in proprietary mutual funds.
This acquisition should put PNC. the nation's 11th-largest bank holding company, m position to vie with Northern Trust Corp. to become sixth-largest investment manager among blinks.
But PNC doesn't plan to stop here. Bank officials have made no secret of their appetite for more acquisitions, either of other institutional money managers. mutual fund companies or administrators of mutual funds.
One rumored target: Federated Investors. also of Pittsburgh, the country's seventh-largest mutual fund manager, with $50 billion of assets. Neither company
will comment on the rumors.
But PNC hopes to grow even without acquisitions. To this end. over the past three years the banking company has centralized its disparate trust investment units into a single unit under the direction of Mr. Caldwell.
The 50-year-old Vietnam veteran, who spent a year in the country aiming artillery, has concentrated his investment firepower into five separate units, each with a distinct investment style.
The goal is to get all of PNC's investment units working together. so that the banking company can tout itself as a one-stop shop.
The integration is seen as a simpler alternative for pension plans than the traditional practice of employing squadrons of separate money managers. .
Mr. Caldwell said PNC aims to tap a trend toward streamlining to boost institutional business beyond the third of PNC's book it will represent after the BlackRock deal is done.
PNC can already claim some success with this approach. In the past two years the banking company has convinced institutional and wealthy investors to put $14 billion into a so-called blended investment capability that mixes the bank's different investment styles.
Mr. Caldwell sees integration helping retail investment sales, too. To this end, the banking company has put together an asset allocation product that helps retail investors mix different PNC mutual funds.
PNC is in the midst of rolling out the service to its trust department and retail brokers, replete with in-house developed marketing software to build investment profiles.
PNC also is planning to offer blended pools of proprietary mutual funds as investment options to 401(k) investors.
Managers in the investment unit brag that PNC's investment integration tops cross-town rival Mellon Bank Corp.'s. This is an important point for a banking company that Mellon dethroned as the largest mutual fund manager among banks when it bought Dreyfus Corp this summer.
But is the focus on investment management paying off for PNC? Clearly, in some quarters the strategy is winning kudos.
"They appear to be a very thoughtful bank responding to the major trends in the marketplace," said mutual fund consultant Geoffrey H. Bobroff, East Greenwich, R.I.
But profit margins in investment management have slightly trailed those for PNC as a whole.
In the first half of this year, profit margins in investment management and trust dipped to 21%, from 23% in the same period last year. The drop came even though investment and trust revenues rose from $150 million to $162 million, according to PNC's financial reports.
Meanwhile, PNC's overall profit margin was just over 25%, on combined net interest and noninterest revenues of $1.5 billion. Margins have basically held steady for the holding company for the past year.
According to the financial reports, investment and trust profits were hurt by rising expenses and declining mutual fund fees. The investment management profits of $34 million were split between $22 million from trust and $12 million from mutual funds.
These profits represented 8% of the bank's total net income of $394 million.
Ms. Bush, of Brown Brothers, said the declining margins .troubled her, especially since they come just ahead of a major acquisition and on the heels of disappointments at other banks.
High on the list of disappointments is Mellon, which stands to suffer from a loss of assets in its Dreyfus funds.
"I don't wish to come across as overwhelmingly negative in this business," she said. "But timing is key."
While she agrees with PNC's prediction that the BlackRock transaction won't dilute earnings, she said she suspects that the banking company's push into investment 'management is illtimed.
"This is happening at a time when consumers again look like they are getting attracted to deposit products," she said.
